UK: The Taylor Wessing Insurance And Reinsurance Review Of 2011

Marine and Energy

Supreme Court rules on inherent vice Loss of jack-up rig under tow

Global Process Systems Inc v Syarikat Takaful Malaysia Berhad [2011]¹ Supreme Court, 1 February 2011

As Lord Birkenhead LC noted in the famous case of British & Foreign Marine Insurance v Gaunt [1921]², a policy on "all risks" terms cannot be held simply to cover all damage howsoever caused "for such damage as is inevitable from ordinary wear and tear ... is not within the policies". The principle is simply this: insurance covers risks, that is to say something that might or might not happen, and not certainties.

The point was developed further in Soya GmbH v White [1983]³, concerning a claim for heat damage to a consignment of soya beans on a voyage from Indonesia to Antwerp. The court in that case drew a distinction between cargo shipped with greater than 15% moisture content, which on the expert evidence it said was bound to suffer heat damage during the intended voyage, and cargo shipped with between 13% and 15% moisture content, which it said "might or might not" result in such damage. In the former case, damage would be regarded as inevitable and thus irrecoverable in principle; in the latter case the damage was fortuitous but resulted from an inherent vice, that is to say the moisture present in the cargo at the time of shipment. In that particular case the claim succeeded because the policy expressly included such loss, by way of an extension covering "heat, sweat and spontaneous combustion".

Commercial Court

The issue has recently come up for consideration again in the long running case of Global Process Systems Inc v Syarikat Takaful Malaysia Berhad. The claim concerned the loss of a jack-up rig being towed on a barge from Galveston to Malaysia. The jack-up rig design allows a working platform to be floated into position and jacked up on cylindrical legs, to suit the sea depth at the point of operation. Steel pins are engaged into the legs through pinholes spaced at six foot intervals and, to reduce stress at the corners of the pinholes, circular holes are incorporated at each corner roughly an inch and a half in diameter. For the present tow, the rig was carried on a barge with its legs in place and elevated in the air above the deck.

The tow was interrupted mid way through the voyage, near Cape Town, where some cracking was found in the way of certain of the pinhole corners. Repairs were carried out and the voyage resumed, but soon after three of the legs broke off and fell into the sea.

The rig was insured as cargo under Institute Cargo Clauses (A), containing the standard exclusion in respect of loss or damage caused by "inherent vice or the nature of the subject matter insured".

At the initial trial, insurers argued that the loss was inevitable and as such there was a lack of the necessary fortuity. Alternatively, they relied upon the inherent vice exclusion. They argued that the legs were not capable of withstanding the normal incidents of the tow, as demonstrated by the fact that they failed in weather conditions that could reasonably have been expected on this voyage. For their part, the assured contended that the question of inevitability had to be judged subjectively; thus, they argued, a claim for inevitable loss would be recoverable unless it could be shown that the assured knew the loss to be inevitable when taking out the insurance. As to inherent vice, the assured contended that the true proximate cause was the failure to carry out adequate repairs in Cape Town.

In the Commercial Court, the trial judge determined that the failure of the legs, though very probable, could not be said to be objectively "inevitable". Citing the British & Foreign case, the judge noted that the onus of proving fortuity "represents a low hurdle for the assured", which in this case the assured had cleared. As such, the insurers' defence of lack of fortuity failed.

Adopting the above approach, the trial judge in Syarikat noted that the legs of the rig had broken off despite the fact that the weather experienced was within the range that could reasonably be contemplated. That was enough to lead to the conclusion that the cargo was incapable of withstanding the ordinary incidents of the voyage, and as such the proximate cause of loss was inherent vice.

Court of Appeal

The matter proceeded to the Court of Appeal, which reversed the decision of the Commercial Court, in a Judgment handed down on 17 December 2009. Having reviewed the authorities and academic texts in some detail, the Court of Appeal came to the conclusion that the test for claims on a cargo policy should in principle be no different to that for hull policies. While not formally overruling Mayban, the Court of Appeal said that, if the action of the sea is the immediate cause of the loss, which clearly was true here, a claim may still lie under the policy even though the conditions were within the range of "what could reasonably be anticipated". If, on the other hand, the cargo had been damaged by the motion of the vessel in weather that could be described as "perfect" or "favourable", then the obvious inference in most cases would be that any damage was indeed the result of inherent vice or the nature of the cargo. The Mayban case, said the Court of Appeal, was not creating a strict rule of evidence one way or the other, so much as a matter of inference.

In the present case, the wave conditions may well have been foreseeable but the Court of Appeal considered that they were not so benign as to create, on their own, an inference of inherent vice. On the evidence, metal fatigue was not the sole cause of the loss of the legs. Rather it was a "leg breaking wave" that had caused the starboard leg to break off, something that was "not bound to occur in the way it did on any normal voyage round the Cape". The loss of the starboard leg led to the others being at greater risk and so they, in turn, also broke off. Though with hindsight this may have been a "highly probable" chain of events, that was not enough to render the proximate cause something other than the perils of the sea, a risk for which the assured was covered under the policy.

Supreme Court

The matter then proceeded to the Supreme Court, which handed down judgment on 1 February 2011. The Supreme Court affirmed the decision of the Court of Appeal, but went further in formally overruling the Mayban decision. In so far as Mayban found that inability of a cargo to withstand the ordinary perils of the seas amounted to inherent vice, that case was wrongly decided, said the Supreme Court. Its effect would be to reduce much of the purpose of cargo insurance, for the cover would then only extend to loss or damage caused by perils of the sea that were exceptional, unforeseen or unforeseeable, and not otherwise. This was inconsistent with the purpose of an all risks cargo policy, namely to provide an indemnity in respect of loss or damage caused by, among other things, all perils of the seas.

The court was therefore left to determine what was, in fact, the proximate cause, unconcerned by whether the sea state could be said to be exceptional or not. Applying the Soya v White test, the Supreme Court concluded that this could not be inherent vice, since inherent vice called for damage to the cargo as a result of its "natural behaviour" and "without the intervention of any fortuitous external accident or casualty". In this case there had indeed been an external fortuity involved, namely the rolling and pitching of the barge in the sea conditions encountered during the voyage. This had caught the first leg at just the right moment to produce stresses sufficient to cause it to break off, thereby leading to increased stresses on the remaining legs and their subsequent breakage. This process could not be anything other than an insured peril of the sea, and consequently the loss was covered.

Court of Appeal rules in Somali piracy case

Masefield AG v Amlin Corporate Member Ltd [2011]⁵

Court of Appeal, 26 January 2011

Background

Under the provisions of the Marine Insurance Act 1906, a total loss of the insured subject matter may be actual or constructive; a marine policy will cover both, unless it expressly provides otherwise. An actual total loss (ATL) calls for the subject matter to be destroyed or for the assured to be "irretrievably deprived thereof". A constructive total loss (CTL), exists where the subject matter is "reasonably abandoned on account of its actual total loss appearing to be unavoidable". This will be so where the assured be presently "deprived" of the subject matter and that either (a) it is unlikely that he can recover it, or (b) the cost of doing so would exceed the value once recovered.⁶

Where a CTL exists, the assured may either treat the loss as a partial loss, or he may elect to treat it as if it were an ATL, by giving notice of abandonment to the insurer.⁷ In many cases, the insurer will decline the notice of abandonment, often disputing that circumstances exist amounting to a CTL, but typically the parties will agree that proceedings are deemed to have been commenced as at the date of the relevant notice. Consequently, the question of whether a CTL existed, or not, is measured against the circumstances present at the date of the notice, rather than by reference to what happened subsequently.

The present case concerned an insured cargo of bio-diesel on board a tanker bound from Malaysia to Rotterdam, which was seized by pirates in the Gulf of Aden.

The pirates took the vessel to Somali waters, but negotiations soon ensued with the owners of the vessel, with a view to the release of the vessel, cargo and crew. While those negotiations were still ongoing, notice of abandonment was served on the insurers, who refused to accept it, but agreed to the date of notice as the deemed date of proceedings.

The negotiations with the pirates were ultimately successful. Some 10 days after the date of the notice, shipowners paid an agreed ransom to the pirates and the vessel was released. She proceeded to Rotterdam where the cargo was safely discharged. The insured cargo owners nevertheless pursued their total loss claim on the policy, in preference to taking delivery of the cargo. The court was therefore required to decide whether the seizure by the Somali pirates amounted to a total loss, notwithstanding the subsequent recovery of the cargo.

Commercial Court

The matter went to trial in the Commercial Court, upon which judgment was delivered in February 2010.

Firstly, on the question of an ATL, the Commercial Court noted that the test of whether the assured had been "irretrievably denied" the cargo was an objective one, to be assessed at the relevant time against the true facts then present, whether all of those facts were known to the assured or not⁸. Although the actual fact of recovery of the vessel and cargo within a short period was not directly material, let alone decisive, the court was entitled to consider what in fact happened after the relevant date in so far as that might assist in showing what the probabilities really were.⁹ Moreover, the correspondence following the seizure, and the information in the public domain at that time, showed that all interested parties were fully aware that the cargoes were likely to be recovered, a view also consistent with the unchallenged expert evidence. Other vessels seized by Somali pirates had been promptly released following negotiations over a relatively short period. The vessel and cargo were safely recovered only 11 days later upon payment of a ransom, representing only a tiny proportion of the value of the ship and cargo.

The trial judge also noted that an assured could not be said to be "irretrievably deprived" of property if it was legally and physically possible to recover it, even though such recovery could only be achieved by disproportionate effort and expense¹⁰. Rather, the assured had to establish that the recovery was not possible. Mere capture by pirates did not, of itself, constitute an ATL,¹¹ not least since acts of pirates did not necessarily occasion any loss at all. The impact and effect of such a capture was very much dependant upon the facts, and, on the facts of the present case, the assured had lost only possession and not the property in its goods. Recovery of possession was not legally or physically impossible, and indeed was expected after the usual period of negotiation.

As to the alternative CTL claim, this also failed in the Commercial Court, for two reasons. Firstly, the cargo had not, in truth, been "abandoned" for the purposes of section 60, which required abandonment of any hope of recovery¹². Although notice of abandonment had been served, the reality was that the shipowners and the cargo owners had every intention of recovering their property and were fully hopeful of doing so. Secondly, for all the reasons considered in the context of the ATL claim, it could not be said that there was a reasonable basis for regarding an actual total loss as "unavoidable", without which there could be no valid CTL.

Finally, the court also rejected the assured's alternative public policy argument, namely that a release of the subject-matter in response to payment of a ransom should not be treated as a relevant or appropriate consideration when deciding whether a vessel and her cargo were, in practice, irrecoverable. The court noted that payment of a ransom was not illegal, nor could it find any "clear and urgent reason" to categorise it as contrary to public policy. On the contrary, the courts have previously held that ransom payments are recoverable as sue and labour expenses incurred pursuant to the assured's duties under section 78(4) Marine Insurance Act 1906¹³.

On this basis, the Commercial Court found in favour of insurers, against which finding the assured appealed.

Court of Appeal

The case presented by the assured in the Court of Appeal was more limited in scope. Firstly, the argument was focused purely on whether there had been an ATL. The CTL case was no longer under consideration. It was the assured's case that seizure by pirates automatically amounted to an ATL, as a rule of law. What actually happened thereafter, as a matter of fact, was irrelevant, they said. Alternatively, argued the assured, seizure by pirates amounted to an act of "theft" within the English criminal law definition. Under the Theft Act 1968, a person who takes the property of another with the intention of returning it only upon terms inconsistent with the owner's rights¹⁴ is guilty of theft. Since theft is an insured peril in its own right, said the assured, an insured loss by theft occurred at the moment of seizure.

As to public policy, the assured conceded that the payment of a ransom was neither illegal nor was it formally contrary to public policy. Nevertheless, it amounted to submission to extortion, and hence was so undesirable from the point of view of the public interest and universal principles of morality, that it could not form part of the assured's duty to avert or minimise the loss. If payment of a ransom could not be required of an assured, as part of its duty under section 78(4), then it must follow that the ATL was suffered at the point when the vessel was seized, or at any rate when notice of abandonment was given.

The Court of Appeal dismissed the assured's appeal on all grounds. Affirming the decision of the trial judge on the question of the ATL, the court held that there was no rule of law that seizure by pirates equalled an ATL. Such a seizure may go on to mature into an ATL, but that depended upon the facts. In this case, the facts were clear. There was not only a chance, but a strong likelihood, that payment of a ransom of a comparatively small sum, relative to the value of the vessel and her cargo, would secure the recovery of both. This was no irretrievable deprivation of property, so much as the typical "wait and see" situation. The court noted that the facts would not even have supported the CTL claim, since it could not be said that there was an "unlikelihood" of recovery.

As to the theft argument, this confused the concept of the "peril" with that of "loss". While theft was a peril insured against, what was required to pursue an insurance claim was the occurrence of a loss as a result of the said peril. There could be no loss without irretrievable deprivation.

Turning finally to public policy in the context of section 78(4), the Court of Appeal could find no universally recognised principle of morality to allow it to conclude that payment of a ransom was "beyond the pale" or "without any legitimate recognition". While it accepted that section 78(4) did not impose a duty on an assured to pay a ransom, it did not follow that a potential total loss which may be averted by the payment of such a ransom thereby became an ATL.

Confirmation of P&I coverage and estoppel

Micoperi SrL v The Shipowners' Mutual Protection and Indemnity Association [2011]¹⁵

Commercial Court, 21 October 2011 The Claimant in this case (Micoperi) was a shipowner based in Italy. On 3 October 2005, one of its vessels was involved in an incident in the Black Sea, in consequence of which it found itself faced with claims from a third party, Toreador Turkey Ltd (Toreador), in the sum of €11.6m. Micoperi denied liability for the claim, and indeed asserted its own cross-claim against Toreador for unpaid invoices of €4.5m, for which it had contemplated arresting property belonging to Toreador, namely a consignment of steel pipes awaiting treatment at a yard in Sicily.

In July 2006, Toreador arrested the vessel in Palermo in support of its claim against Micoperi. It offered to release the vessel in exchange for security, while at the same time offering to provide counter-security with respect to Micoperi's cross claim. In the normal way, Micoperi turned to its P&I Club (the Club), the Defendants, for assistance. The Club confirmed cover and duly provided security in the form of a standard letter of undertaking (LoU). The vessel was released. The parties then turned their attention to their substantive claims against each other, to be litigated in the English High Court. The Club appointed solicitors to act for its member, Micoperi, in those proceedings.

At that point, however, matters took an unexpected turn. The Club's managers belatedly came to the view that the loss was not, in fact, covered after all, because the casualty resulted from "specialist operations" and was thus excluded from the P&I cover. Nevertheless, the Club agreed to continue the management of the English litigation on Micoperi's behalf, but under a reservation of rights. In due course, that litigation proceeded to mediation, resulting in a settlement by which Micoperi agreed to pay a net sum of €5.8m to Toreador. The Club was bound to make good the settlement sum directly to Toreador under the LoU, but it sought to recover the said payment from its member, Micoperi, alleging that there was in fact no policy coverage. That dispute was referred to arbitration under the Club rules.

In defence of the Club's claim, Micoperi argued that the Club was estopped from denying coverage, having given a clear representation of cover at the outset, upon which representation Micoperi said it had relied by not settling Toreador's claim sooner and/or not arresting Toreador's property as security for the cross-claim, and generally in accepting a settlement which it (Micoperi) thought was too high. Consequently, argued Micoperi, it would now be inequitable to permit the Club to enforce its alleged right to deny coverage.

The arbitrators found against Micoperi. Although they accepted that the Club had conveyed an unequivocal confirmation of cover, they concluded that Micoperi had not acted in reliance upon that representation in any way. Micoperi in turn appealed against that decision to the Commercial Court, alleging an error of law or serious irregularity in the tribunal's reasoning.

In a judgment handed down on 21 October 2011, the Commercial Court refused to overturn the tribunal's decision. Micoperi having asserted that the €5.8m settlement was "much too high", the court considered that it was quite proper for the arbitrators to reach a view as to whether that was true or not; in their assessment, a net settlement at €5.8m was in fact the best that could have been achieved, and it correctly took into account Micoperi's counterclaim for unpaid invoices. It followed that Micoperi had not relied upon confirmation of Club cover in agreeing the settlement, since it was not a deal that could have been improved upon in any case. As to Micoperi's forbearance in arresting the pipes in Sicily, Micoperi's alleged reliance was overtaken by the fact that Toreador, in fact, provided security for that claim. Consequently, nothing was lost by their failing to arrest.

War Risks Arrest proceedings and the meaning of "ordinary judicial process"

Melinda Holdings SA v Hellenic Mutual War Risks Association (Bermuda) [2011]¹⁶

Commercial Court, 18 February 2011 While P&I Club war risk rules are intended to insure vessel owners in respect of capture, arrest and restraint, they will ordinarily exclude such losses where they arise merely in the course of the "ordinary judicial process". Thus, a normal judicial arrest in the context of, for example, a claim for cargo damage, or pollution liability, does not thereby give rise to a war risk loss by arrest or restraint.

The circumstances behind the present case began in 1996, with the grounding of the vessel SAFIR on coral reefs off the Egyptian coast, causing substantial environmental damage. Proceedings were brought by various Egyptian government agencies in the Port Said court against the owners of the SAFIR, Fonderance Overseas Inc (Fonderance), and the managers Seama International Shipping (Seama), leading to a judgment in December 1996.

The judgment included two elements of so-called court dues commonly imposed in Egyptian proceedings against unsuccessful defendants. The first element, in this case 5% of the amount claimed, was referred to by the court as proportional court fees, payable to the Egyptian National Treasury. The second element, representing 2.5% of the claim, was described as a payment to the "Judges' Fund" or the "Judicial Services Fund", used to pay for the health and welfare of present and former judges, state lawyers, and their families. At the time of the present proceedings, the entire judgment against Fonderance and Seama remained unsatisfied.

Some 12 years later, in December 2008, the vessel SILVA was arrested by the Port of Suez court, purportedly in execution of the 1996 judgment, upon an application brought at the behest of the court claims office, specifically in pursuit of the court dues element of the judgment. The arrest was sought upon little more than the bald assertion that the beneficial owners of the SILVA and the SAFIR were one and the same, supported by documentation which the English court found to be forged in any event. In truth, there was no connection between the owners of the two vessels, a fact that was clear from other evidence put before the Egyptian court. Nevertheless, the arrest was ordered and maintained.

It was common ground that the vessel was a total loss. The issue between the assured and the defendant insurer was simply whether the loss took place in the course of "ordinary judicial process". In considering the meaning of the expression, the Commercial Court referred to the earlier decision of Mocatta J at first instance in The Anita [1970]¹⁷ thus:

As a starting point, the court noted in the present case that the purpose of the claim was to enforce and recover, amongst other things, the judges' fund for its benefit. Thus, the judges were pursuing their own purposes, and moreover hearing their own cause, which inevitably put their independence in question. The English court also found that the forged documents upon which the arrest had been sought had come from a ship chandler who had an arrangement with the Egyptian authorities and the court to assist them for reward in the collection of court dues. Far from being an "ordinary judicial process", this was in fact an exercise in extortion from owners of an innocent and unconnected vessel of sums owed in respect of another vessel. The exercise was pursued in the expectation that sums would be paid out, or, at the very least, secured (with judgment or compromise likely to follow), so that the court's purpose of recovering the monies could be achieved. This could not be described as an "ordinary judicial process", and consequently the court found for the assured.

In the alternative, the insurer contended that the assured had failed in its duty to sue and labour. Specifically, it was said that an ordinarily competent Egyptian lawyer would have advised the assured to act differently in response to the proceedings, with different results. There could have been an offer of Club security, for example, to release the vessel from arrest, or a separate claim for wrongful arrest; the assureds could have issued an application for recusal (removal of the Judge) or relied upon time bar defences. Having heard all of the evidence, the English court was satisfied that none of these steps were likely to have succeeded, and indeed in some cases they would have risked making matters far worse. At any rate, no criticism whatever could be made of the way in which the assured and its lawyers handled a "difficult and intractable situation". That being so, there was no breach of the duty to sue and labour.

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Footnotes

1 [2011] UKSC 5

2 [1921] 2 AC 41

3 [1983] 1 Lloyd's Rep 122

4 [2004] 2 Lloyd's Rep 609

5 [2011] EWCA Civ 24

6 s. 60(2) Marine Insurance Act 1906

7 ss. 61 and 62 Marine Insurance Act 1906

8 Marstrand Fishing Co Ltd v Beer (1936) 56 Ll L Rep 163

9 Bank Line Ltd v Arthur Capel & Co [1919] AC 435

10 Fraser Shipping Ltd v Colton [1997] 1 Lloyd's Rep 586 QBD

11 Dean v Hornby [1854] EngR 113

12 Court Line Ltd v R [1945] 78 Ll L Rep 390

13 Royal Boskalis Westminster NV v Mountain [1999] QB 674

14 For example, against payment of a ransom

15 [2011] EWHC 2686

16 [2011] EWHC 181 (Comm)

17 [1970] 2 Lloyd's Rep 265, at 377

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